Mitchell v. Trustees of U.S. Mut. Real Estate Inv. Trust
| Decision Date | 30 October 1985 |
| Docket Number | Docket No. 79225 |
| Citation | 144 Mich.App. 302,375 N.W.2d 424 |
| Parties | William Erick MITCHELL and Paula Lee Mitchell, Plaintiffs-Appellants, and Frank J. Kelley, Attorney General of the State of Michigan, ex rel, Eugene Kuthy, Commissioner, Financial Institutions Bureau, Michigan Department of Commerce, Intervening-Plaintiffs-Appellants, v. TRUSTEES OF UNITED STATES MUTUAL REAL ESTATE INVESTMENT TRUST and Detroit Bond and Mortgage Investment Co., Defendants-Appellees. |
| Court | Court of Appeal of Michigan — District of US |
MacLean, Seaman, Laing & Guilford by Dwight D. Ebaugh, Lansing, for plaintiffs; and Frank J. Kelley, Atty. Gen., Louis D. Caruso, Sol. Gen., and Luis F. Fernandez, Asst. Atty. Gen., Consumer Protection Div., Lansing, for intervening plaintiffs-appellants.
Dykema, Gossett, Spencer, Goodnow & Trigg by Timothy A. Fusco and Kathleen McCree Lewis, Detroit, and Cooper & Fink by Daniel S. Cooper, Lansing, for defendants-appellees.
Before R.B. BURNS, P.J., and BRONSON and TAHVONEN *, JJ.
This action involves a $77,600 non-purchase-money "wrap-around" mortgage note made by plaintiffs Mitchell and payable to defendant United States Mutual Real Estate Investment Trust (hereafter, US Mutual) with interest of 11%. The circuit court held that Michigan's usury statutes had been preempted by federal legislation so that the note was not usurious as a matter of law. We reverse.
On August 21, 1978, plaintiffs borrowed $65,200 from the Bank of Lansing for the construction and purchase of a home. Interest was set at 10%. Under the terms of a 30-year promissory note, payments of $572.46 were to be made monthly. The note was secured by a mortgage which was recorded on August 24, 1978. Bank of Lansing is not a party to this suit.
On October 28, 1980, plaintiffs borrowed $10,200 from US Mutual in order to repay other debts. Additionally, plaintiffs were assessed various fees by defendants for a total indebtedness of $13,380.66. The loan was arranged by defendant Detroit Bond and Mortgage Company, as agent and manager of US Mutual. At the time of this loan, the principal balance of plaintiffs' Bank of Lansing note was $64,219.34. This balance plus the indebtedness to US Mutual amounted to $77,600, the face amount of a seven-year "wrap-around mortgage note". By its terms, the note was secured by a second mortgage on plaintiffs' home:
The wraparound mortgage note provided for an interest rate of 11% on the balance of the wraparound loan. Under the terms of the wraparound note, plaintiffs were to make minimum monthly payments of $761 to US Mutual; however, a rider to the note indicated a monthly payment of $849 would be required to amortize within seven years the amount owed US Mutual.
From the monthly payments made by plaintiffs to US Mutual, US Mutual was to remit $722.46 each month to Bank of Lansing ($572.46 principal plus interest and $150 tax escrow). The balance of plaintiffs' monthly payments was to be applied to plaintiffs' indebtedness to US Mutual. The mortgage rider further provided:
After repayment of the wraparound loan, plaintiffs would continue to make payments on the Bank of Lansing mortgage for the balance of its 30-year term.
Between November 1980 and November 1981, plaintiffs paid US Mutual $911 per month on the wraparound note. Between December 1981 and December 1982, plaintiffs made 10 monthly payments of $921. In January 1983, US Mutual instituted foreclosure proceedings. In March 1983, plaintiffs made a payment of $5,700 to US Mutual. In February 1983, plaintiffs sought a statement of account from US Mutual but were unsatisfied with the response. Plaintiffs began paying the Bank of Lansing directly on the first mortgage note.
When payments on the wraparound mortgage note ceased, US Mutual commenced a second foreclosure action against plaintiffs. On July 15, 1983, US Mutual caused a sheriff's sale of plaintiffs' residence to be held. US Mutual tendered the high bid of $16,664.17. Plaintiffs' right of redemption was set to expire on January 15, 1984.
Plaintiffs filed a complaint against US Mutual and Detroit Bond and Mortgage Company on January 10, 1984. One of the two counts alleged was that the interest on the wraparound note was usurious because it exceeded 7%, contrary to M.C.L. Sec. 438.31; M.S.A. Sec. 19.15(1). Subsequently, a temporary restraining order to stay the running of the redemption period was entered.
In defendants' answer, as an affirmative defense to the usury count, they averred that the interest charged under the wraparound mortgage note was not usurious for the reason that the transaction was governed by the terms and conditions of the Depository Institutions Deregulation and Monetary Control Act of 1980, Pub.L. 96-221, Title V, Sec. 501(a)(1), 94 Stat. 161, 12 U.S.C. Sec. 1735f-7 note. Under this act, state usury laws are preempted under certain circumstances.
Both parties filed motions for partial summary judgment on the usury count. Plaintiffs' theory was that (1) pursuant to Michigan law, defendants were limited to charging interest not exceeding 7%, (2) preemption under federal law applies only to first liens, and (3) as a matter of law, the wraparound mortgage in this case was not a first lien. Defendants' theory was that (1) federal law preempts state usury statutes when loans made by certain creditors are secured by a first lien on residential real property, (2) that the wraparound mortgage in the instant case constituted a "first lien" as defined by the Federal Home Loan Bank Board (hereafter, FHLBB), and (3) that US Mutual was a "creditor" as contemplated by the preemption statute.
The trial judge granted defendants' motion for partial summary judgment and the final order was entered on June 27, 1984. Plaintiffs appeal. This Court has granted the Attorney General leave to intervene.
A wraparound mortgage is a junior mortgage which secures a promissory note with a face amount equal to the sum of the principal balance of an existing mortgage note plus any additional funds advanced by the wraparound lender. Wraparound mortgages may be used in several forms, depending upon the status of the lender and the borrower in relationship to the property encumbered. Typically, however, wraparounds are either purchase-money mortgages, where the wraparound lender is either the real estate seller or a third party, or refinancing or non-purchase-money mortgages, where the lender is either the same lender that holds the first mortgage or a third party. See Arditto, The Wrap-Around Deed of Trust: An Answer to the Allegation of Usury, 10 Pac LJ 923 (1979), for a discussion of various types of wraparound mortgages.
This case involves a third party, non-purchase-money type of wraparound transaction. In such transactions, the borrower's payment under the second, wraparound note covers the debt service on both the first indebtedness and the additional loan advance. While not assuming the original mortgage note obligation, the wraparound lender undertakes to make the payments on the original, "wrapped" mortgage note as it receives wraparound payments from the borrower. 1
In a wraparound situation, the lender is by definition advancing only a portion of the face value of the wraparound note, but it receives interest calculated on the full face amount of the note. Generally, it is this increased yield which raises usury problems. 2
M.C.L. Sec. 438.31; M.S.A. Sec. 19.15(1), Michigan's basic usury statute, provides:
"The interest of money shall be at the rate of $5.00 upon $100.00 for a year, and at the same rate for a greater or less sum, and for a longer or shorter time, except that in all cases it shall be lawful for the parties to stipulate in writing for the payment of any rate of interest, not exceeding 7% per annum."
US Mutual asserts that it is exempt from the 7% interest ceiling of this statute by virtue of the Depository Institutions Deregulation and Monetary Control Act of 1980. Section 501(a)(1) of that act, 12 U.S.C. Sec. 1735f-7 note, provides:
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